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Emerging markets join jumbo trade war

Emerging markets join jumbo trade war

Talk about a twist in the tale.

Just when US’ tariff refrain against the ‘usual suspect’ China was starting to get old, other nations have joined the jumbo party to slap retaliatory tariffs on the world’s biggest economy.

Last week the European Union (EU) imposed import duties of 25% on US products worth EUR 2.8 billion ($3.2 billion) in response to US President Donald Trump’s decision to hit trade partners with tariffs of 25% on steel and 10% on aluminium.

Meanwhile, the Canadian government has said that it will impose tariffs on CAD 16.6 billion ($12.4 billion) worth of US exports from 1 July, while Mexico has hit back with tariffs on range of US imports.

Closer to home, Turkey and India, too, have announced similar measures in reaction to the new tariffs by the Trump administration. Turkey began retaliatory tariffs worth $266.5 million, while India will start imposing additional duties worth $235 million on 29 US products in August.

Cranberries, almonds, jeans, and even Harley Davidson motorbikes have all been caught in the crossfire as the global tit-for-tat trade friction ramps up.

China, of course, is the most bruised from Trump’s actions. US has identified $200 billion of Chinese exports that can be slapped with a 10% tariff. This is in addition to a 25% import tariff on the initial $50 billion worth of goods starting July and another $100 billion under investigation.

Money managers weighing in on the situation are noting that trade war pressures are rising, and there is growing risk of disruptive escalation.

Julius Baer believes that trade quarrels with China will continue at least until November, with a probability of 20% for an escalation to trade war.

‘With the November mid-term elections coming closer, Trump is keeping foreign trade a playground for domestic politics, as it boosts his approval ratings,’ economist David A Meier wrote in a note.

‘However, this may also be a limiting factor: potential economic hardship, in the case of a trade war, risks damaging Trump’s popularity,’ he added.

According to Richard Jerram, economist at Bank of Singapore, Beijing has limited ammunition in its magazine.

Selling down $1.2 trillion worth of China’s US Treasury holdings will be difficult because of the lack of buyers and switching back into renminbi would be disastrous for the exchange rate, he stated in a note.

‘It might be that financial markets offer the best hope of restraint, as Trump has previously viewed the equity market as a gauge of his performance,’ he said.

Bank of Singapore and UBP expect China to loosen monetary policy to stabilise its growth rate, pointing to potential reserve ratio requirement cuts by the People’s Bank of China in the second half of the year.

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